Scenario 12-2
Suppose Regina and Ben receive great satisfaction from their consumption of cheesecake. Regina would be willing to purchase only one slice and would pay up to $13 for it. Ben would be willing to pay $17 for his first slice, $14 for his second slice, and $10 for his third slice. The current market price is $10 per slice.
-Suppose Luke values a scoop of Italian gelato at $4. Leia values a scoop of Italian gelato at $6. The pre-tax price of a scoop of Italian gelato is $2. The government imposes a tax of $3 on each scoop of Italian gelato, and the price rises to $5. The deadweight loss from the tax is
A)$4, and the deadweight loss comes from both Luke and Leia.
B)$4, and the deadweight loss comes only from Luke because he does not buy gelato after the tax.
C)$2, and the deadweight loss comes from both Luke and Leia.
D)$2, and the deadweight loss comes only from Luke because he does not buy gelato after the tax.

Question

Quizplus · Accepted Answer

The deadweight loss is $2, which comes only from Luke because he values a scoop of gelato at $4, but after the tax, the price is $5, so he does not buy it. Leia still buys the gelato because her valuation ($6) is higher than the post-tax price ($5), so she is not part of the deadweight loss.

Scenario 12-2 Suppose Regina and Ben Receive Great Satisfaction from Their Consumption